Multinational Enterprises and their hosts: An 'impact' assessment on the United Kingdom

Table of Content

  Abstract  2

1.  Foreign direct investment flows into the UK (inward)  3

2.  Cost and benefits of FDI in theoretical and empirical terms  7

2.1  Balance of payment effects  8

2.2  Employment effects  10

2.3  Technological effect  12

2.4  Sovereignty  14

3.  Policy implications  15

  Bibliography  17

  Appendix  20

1

The desire to attract inward investment is one of the few industrial policies pursued consistently by successive UK governments over the past twenty five years. (Pain, N.)

It is widely recognized that foreign direct investment (FDI) may play a significant role in helping to transfer leading-edge skills, technologies, management styles and other best practices to host economies. (Potter, J. & Moore, B. & Spires, R., 2003)

However, research that has assessed the benefits (and costs) of attracting foreign direct investments into host states and regions demonstrates that foreign firms, even within the same industry sector, may differ considerably in their ability to contribute to host regions’ economies. (Potter, J. & Moore, B. & Spires, R., 2003)

This work will assess the impact of Multinational Enterprises on the British economy . With regards to Daniels, J. & Radebough, L. (2004) “a company that has a worldwide approach to markets and production is known as an MNE. It usually undertakes nearly every type of international business practice.” For the purpose of this work a MNE will further be defined as a company who owns and controls assets.

The report is fundamentally structured into three parts. First there will be given a brief overview about foreign direct investment flows into the United Kingdom. The second part will analyse the cost and benefits of FDI for the United Kingdom both in theoretical and empirical terms. Based on the assessment the last section will suggest policy implications. The work is based on secondary research to a large extent.

1. Foreign direct investment flows into the UK (inward)

“Foreign direct investment (FDI) refers to investment that adds to, deducts from, or acquires a lasting interest in an enterprise operating in an economy other than that of the investor, the investor’s purpose being to have an "effective voice" in the management of the enterprise. For the purposes of the statistical inquiry, an effective voice is taken as equivalent to a holding of 10 per cent or more of the ordinary shares or voting power for any incorporated subsidiary or associate enterprises or the equivalent for unincorporated branch enterprises (National Statistics, 2004).”

To provide a good descriptive base for the “impact” assessment in Part 2, there will be first given a briefly overview about the recent trends of inward FDI to the UK. The data is taken from National Statistics.

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In 2002 there were net foreign direct investment flows of £18.5 billion from foreign companies. This means a decrease of 49 % from the £36.6 billion in 2001. (figure 1)

Figure 1.

Source: National Statistics, Foreign Direct Investment 2002

United Kingdom FDI flows are mainly from developed countries. The European Union replaced the United States as the main partner since 1999.

Europe increased the investment flows up 11% from a £17.2 billion in 2001 to £19.1 billion. At the same time Americas (North, Central & South) decreased from a £16.1 billion investment in 2001 to a disinvestments of £2.4 billion in 2002 and investment from Asia felt down 19% from £3.1 billion in 2001 to £2.6 billion in 2002. (figure 2) The most FDI flows in 2002 came from the following countries: Germany, The Netherlands, Japan and France. (figure 3)

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Figure 2. Figure 3.

Source: National Statistics, Foreign Direct Investment 2002

The tertiary sector accounts for the largest share of FDI inflows.

Due to the industrial analysis the FDI in the service sector felt down 15% to £17.9 billion (in 2001: £21.0 billion), while manufacturing felt to a net disinvestments of £2.7 billion compared with a investment of £12.2 billion in 2001. The resources flow were unchanged £3.4 billion. (figure 4)

The two top sectors in 2002 were electricity, gas & water with £8.6 billion and financial services with £5.8 billion. On the other hand there was a net disinvestments of £4.4 billion in the vehicles and other transport equipment sector. (figure 5)

Figure 4. Figure 5.

Source: National Statistics, Foreign Direct Investment 2002

In 2002 the net foreign direct investment international investment position in the UK was £352.6 billion. Compared with 2001 that means an increase of 1% to an new record figure. While Europe and Asia shows significant increases the FDI investment position felt in other

regions like America. (see figure 6) Figure 7 shows the top ten investor countries.

Figure 6.

Source: National Statistics, Foreign Direct Investment 2002

Earnings from foreign direct investments in the UK fell to £17.3 billion in 2002, compared to £20.0 billion in 2001. The proportions of earnings from FDI investment in the UK for each of the continental regions can be seen in figure 8. Figure 9 provides an overview about the top ten countries accounting for the largest earnings from FDI investments.

Source: National Statistics, Foreign Direct Investment 2002

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